The IMF’s 2007 Regional Economic Outlook for the Western Hemisphere says the erosion of European Union (EU) trade preferences will cause Guyana to have a cumulative output decline of up to 6.5% by 2010 as the preferential sugar trade is phased out.
The study also suggested that affected countries implement a number of adaptation strategies to mitigate some of the impacts. The EU unilaterally scrapped the Sugar Protocol in September while critical talks on preserving the benefits in new Economic Partnership Agreements were still ongoing. Set up in 1975 between the EU and 18 African, Caribbean and Pacific (ACP) sugar-producing countries, the Sugar Protocol had offered ACP countries access to the EU market and a guaranteed price for sugar for an ‘indefinite duration’.
From July last year the European Commission’s (EC) proposal to slash the price of sugar by 36% by 2013 began to kick in. It was announced that 40 million euros would have been given to the ACP countries to start their adjustment programmes but already some countries in the Caribbean have begun to shut down or to scale down their operations.
The report said that targeted safety nets and other steps to assist affected populations could be part of transition measures critical to helping vulnerable agricultural workers cope with the decline in incomes associated with preference erosion.
“Such measures could include establishing narrowly targeted income transfer schemes within the overall fiscal constraints, allowing workers to continue participation in national pension schemes with lower or no self contributions, and providing job searching and retraining opportunities where feasible,” the report said.
Another strategy that the report endorses is encouraging more efficient agricultural production. It pointed out that in some instances, remaining price-competitive under the new trade regimes will likely require undertaking new investments, “which can be challenging for countries with high debt and limited fiscal space.” It said too that shifting out of traditional agriculture, in other cases, may be the only feasible option.
The report also said “Continuing efforts to improve the investment climate, lower business costs, and enhance labour skills will help encourage a reallocation of resources away from sectors that are no longer economically viable.”
The report, which was released this month, said that even in countries with smaller macroeconomic effects, the social costs of trade preferences loss can be severe, given the adverse impact on the incomes of poor rural households and aging farmers who have limited alternative employment opportunities. In concluding, it said that the current economic and political context provides a favourable opportunity to reinvigorate reforms and advance integration. “Regional growth remains strong and the external environment is still favourable,” the report said.
“At the same time, recent or expected political transitions and renewals in the region can provide the necessary popular mandates to implement deep reforms and shore up fiscal and debt-reduction strategies,” it said.
The report pointed to the fact that several Caribbean countries, including Guyana, embarked on tax reforms, such as the introduction of a value-added tax which has helped strengthen revenue collections. Moreover, budgets have weathered adverse developments more successfully in recent years because of reforms to enhance fiscal flexibility, such as mechanisms to keep domestic petroleum prices more closely aligned with import costs.
However, it also said that the outlook for the Caribbean will continue to depend on external events as well as domestic policy responses. “The Caribbean region is highly exposed to the risk of shocks, and downside risks have increased in a number of respects,” it said.
